I have noticed something about electronic filing of tax returns, especially state returns: there is a noticeable creep to demanding more and more information. I can understand if we are discussing tax-significant information, but too often the matter is irrelevant. We received a bounce from Wisconsin, for example, simply because there was a descriptor deep in the state return without an accompanying number.
How did this happen? Perhaps there was a number last year but not one this year. Could an accountant have scrubbed it out? Yes, in the same way that I could have played in the NFL. Work on a return of several hundred pages, add a few states in there for amusement, tighten the screws by closing in on a 15th deadline and you might miss a description on a line having no effect on the accuracy of the return.
Why is this an issue?
Because if a state – say Wisconsin - bounces a return, then it is the same as never having filed a return. The penalties for not filing a return are more severe than – for example - filing a return but not paying the tax. Does it strike you as a bit absurd for a state to argue that one never filed a return when an accountant prepared (and charged one for) that state return?
The US Tax Court has reviewed the issue of what counts as a federal tax return in a famous case called Beard v Commissioner. The Court looks at four items, each of which has to be met:
· It must purport to be a return;
· It must be signed under penalty of perjury;
· It must contain sufficient information to allow the calculation of the tax; and
· It must be an honest and reasonable attempt to satisfy the requirements of the tax law.
Let’s look at a case involving the Beard test.
John Spottiswood (let’s call him Mr S) filed a joint 2012 tax return using TurboTax. He made a mistake when entering a dependent’s social security number. He submitted the electronic return through TurboTax on or around April 12. Within a short period, TurboTax sent him an e-mail that the IRS had rejected the return.
Problem: The e-mail was sitting in TurboTax. Mr S needed to log back in to TurboTax to see the e-mail. A professional would know to check, but an ordinary individual might not think of it.
Another Problem: Mr S owed almost $400 grand with the return. Since the return was never accepted, the bank transfer never happened. He did not pay the tax until almost 2 years later.
The IRS tagged him over $40 grand for late payment of tax.
I have no issue with this. Think of the $40 grand as interest.
The IRS also tagged him over $89 grand for late filing of the return.
I have an issue here. Mr S did try to file; the IRS rejected his return. I see a significant difference between someone trying and failing to file a return and someone who simply blew off the responsibility to file. It strikes me as profoundly unfair to equate the two.
Mr S protested the late filing penalty.
He had two arguments:
(1) He did file (per the Beard standard).
(2) Failing that, he had reasonable cause to abate the penalty.
I like the first argument. I would advise Mr S to provide a copy of the return to the Court and request Beard.
COMMENT: I suppose the issue is whether the return would meet the third test – sufficient information to calculate the tax. I would argue that it would, as the IRS could deny the dependency exemption and recalculate the tax accordingly. If Mr S objected to the loss of the exemption, he could investigate and correct the social security number.
FURTHER COMMENT: The IRS argued that it could not calculate the tax because it had rejected the return. I consider this argument sophistry, at best. The IRS could simply reject a return ... some returns … all returns … and make the same argument.
But Mr S could not provide a copy of the return.
Why not? Who knows. I suppose he never kept a copy and later lost the username and password to the software.
The Court cut him no slack. To conclude that the return met the Beard standard, the Court had to … you know … look at his return.
That left his second argument: reasonable cause.
The Court again cut him no slack.
The Court said that he should have logged back into TurboTax and yada yada yada.
Seems severe except for one thing: how could Mr S fail to realize that he never got dinged with an almost-$400 thousand bank transfer? I get that he carried a large bank balance, but reasonable people would pay attention when moving $400 grand.
Mr S could not provide a copy of his return nor could he explain how he could blow-off $400 grand. The Court was not buying his jibe.
There was no Beard for Mr S, nor was there reasonable cause to abate the penalty.
OBSERVATION: It occurs to me that Mr S may have received no advantage from the dependency exemption. This case involves a 2012 tax return, and for 2012 it is very possible that the alternative minimum tax (AMT) applied to this return. The AMT serves to disallow selected tax attributes to higher-income taxpayers – attributes such as a dependency exemption (I am not making this up, folks). The Court did not say one way or the other, but I am left wondering if he was penalized for something that did not affect his ultimate tax.
Our case this time was Spottiswood v US.